Best is lossless and Apple Lossless takes up a bit less space than AIFF, but sound wise any lossles is much of a muchness. AAC is supposed to sound better (and does to me) than MP3 and if you set AAC to itunes plus you get the higher bit rate of 320kbps. Try some tracks at lossless and AAC itunes plus and if you can't tell the difference, itunes plus will be fine.
On the itunes tool bar click on edit and in the drop down box click on preferences. The box that appears should go straight to general, if not click that tab. In the middle of the box you will see Import settings, click that and another samller box appears. In the top drop down box find AAC encoder and then in the box below find itunes plus. You see all the other settings there as well.
itunes plus is only 256kbps,to get the highest bit rate within aac encoder you need to select custom(not itunes+) which will give the option of 320kbps.